~ Investment Strategy

Macro Diary

It would be as well to pay attention to the political risks in Europe. I do not at present see anything that could derail the improvement in the markets’ view of Europe, but from small acorns and all that.

In Spain, Mr. Rajoy is caught up in a scandal over alleged secret payments. The idea is that various companies made payments to a PP slush fund, which distributed money so senior party officials including — according to alleged records published in El Pais — Mr. Rajoy. It is not clear what the payments were for. The PP has, reportedly, lost 6 points in the polls since the scandal broke, and is now at 24%. On the other hand, it is still well ahead of the hapless opposition.

In Italy, Mr. Burlusconi is narrowing the lead of Mr. Bersani. However, no party is challenging the “fiscal compact” agreement with the EU, so Italy’s budget should not become an issue whoever wins the election. A greater risk is a period of confusion as a government is formed.

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I have been rather slow to see the reason why UK breakeven has jumped, bringing down the pound. The obvious reason is Mr. Carney’s recent comments, which have suggested a doveish attitude. I will check the dates to make sure they match up with his recent speeches. This is one of the things about working alone — you can miss things that are staring you in the face. The obvious struck me when I was chatting about the subject over dinner.

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A strong report on non-farm payrolls took US equities to new highs on Friday, helped by a good ISM report and an upward revision to Michigan Sentiment for January which took the series up MOM. Non-farm payrolls for January were roughly as expected by the numbers for the previous two months were revised up. The unemployment rate rose to 7.9%, the second monthly rise, but the report described the situation as “essentially unchanged”. The only slight negative note came from auto sales, which fell back for a second month in January. In the Eurozone, unemployment fell to 11.7%, which I think was the first decline since January 2011, and the CPI flash estimate was at 2%.

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US interest rates moved downward on the unemployment number until the other, stronger, numbers filtered into the market’s consciousness. Every tick upward in the unemployment rate brings the first interest-rate hike further away (6.5% being the threshold for the first one), while every strong number for the economy in general brings the end of QE3 closer. I am not sure the market knew which way to turn at first, but the overall strength of the data releases meant that 10-year rates rose again as the day went on.